Moving to Panama can feel like stepping into a tropical paradise, and it might just dramatically lower your taxes. For the average American dreaming of living abroad, Panama offers one of the most tax-friendly systems in the world.
In this guide, we’ll break down in plain language why Panama is so appealing for expats looking to legally reduce their taxes, covering everything from Panama’s territorial tax system and income tax rates to residency visas and other taxes you should know about. No tax expertise needed, just a willingness to imagine life in a place where the sun is warm and foreign income isn’t taxed at all!
Panama’s Territorial Tax System
Panama’s tax system is based on the principle of territoriality. This means Panama only taxes income earned within Panama any money you make abroad is not subject to Panamanian tax. Whether you’re a Panamanian citizen, a resident expat, or a non-resident, what matters is the source of your income, not your citizenship or where you’re living. If the income doesn’t come from Panamanian sources, it’s completely tax-free in Panama.
For example, if you retire to Panama and your income is from U.S. Social Security or an investment portfolio back home, Panama will not tax those earnings. Similarly, if you work remotely for a U.S. company or run an online business with customers outside Panama, that foreign-sourced income is not taxed by Panama. This is a huge advantage, many expats legally pay zero tax to Panama on their retirement pensions, dividends, or remote work income originating from outside the country.
It’s important to note that because foreign income is exempt, Panama’s tax law doesn’t even bother distinguishing between “resident” and “non-resident” for tax purposes in the way other countries do.
In other words, unlike the U.S., Panama doesn’t tax you on worldwide income regardless of your status, it cares only about what is earned locally. This territorial approach is the cornerstone of Panama’s appeal as a low-tax destination.
Personal Income Tax Rates in Panama
So what happens if you do earn income from within Panama? Don’t worry, Panama’s income tax rates are relatively low and progressive, meaning higher earnings are taxed at a higher rate. As of 2025, the tax brackets for individual income are:
- 0% tax on the first $11,000 of Panamanian-sourced income (this portion is tax-free).
- 15% tax on income between $11,001 and $50,000.
- 25% tax on any income over $50,000.
In practical terms, if you earned $60,000 of Panama-source income (say from a local job or business), the first $11k is not taxed at all, the next $39k is taxed at 15%, and only the amount above $50k (i.e. $10k) is taxed at the 25% rate.
This results in a much lower effective tax rate than you might pay on the same income in the U.S., especially considering U.S. federal rates can be significantly higher than 25%.
Example: Imagine you open a small business in Panama City. If it earns $50,000 in taxable profit in a year, you’d pay about $5,850 in Panama income tax (15% of the amount over $11k) and nothing on the first $11k. That’s it, roughly an 11.7% effective tax rate on a $50k income, thanks to the generous zero-tax band for the first $11,000.
Furthermore, Panama provides various tax exemptions and exclusions that can reduce your taxable income. For instance, Panama does not tax certain types of income at all, such as interest earned from Panamanian bank accounts or government bonds.
There’s also a long list of other exempt income categories, including some dividends from small businesses, severance payments up to a limit, winnings from lotteries or gambling, and even inheritances and gifts.
In fact, inheritance, gifts, and foreign-earned money are all tax-free in Panama, which means you won’t face an estate or gift tax as you might in the U.S. (Panama has no separate inheritance or wealth tax at all).
If you’re an American expat in Panama, you’ll likely pay nothing to Panama on income coming from outside Panama, and even local income (if you have any) is taxed at moderate rates with a chunk of it tax-free. This favorable setup allows many expats to drastically lower their total tax burden while living comfortably in Panama.
Becoming a Resident of Panama (And Why It Matters)
To take full advantage of Panama’s tax system and live there long-term, you’ll need to sort out your residency status. Thankfully, Panama makes this relatively easy, especially for citizens of the U.S. and many other “friendly” countries. Here’s what you need to know:
Tax Residency vs. Legal Residency: In Panama, you are considered a tax resident if you spend more than 183 days in the country in a calendar year (consecutive or not) or if Panama becomes your center of life (e.g. you establish a permanent home and economic ties there).
However, because Panama won’t tax you on foreign income regardless, being a tax resident is not critical for avoiding Panama taxes, it’s already territorial. The more important aspect for expats is obtaining legal residency (a visa/permit) that allows you to live in Panama beyond the tourist visa period and eventually apply for a tax residence certificate if needed.
Legal residency is what lets you stay in Panama year-round and enjoy the benefits (and it can help for U.S. tax purposes to show you’re a bona fide foreign resident).
Friendly Nations Visa
Panama has a program called the Friendly Nations Visa, designed for citizens of friendly countries, and yes, the United States is on the list. This visa is one of the most popular pathways for expats. The requirements have evolved, but generally, it offers a streamlined route to permanent residency if you can demonstrate some economic ties to Panama.
Examples of such ties include setting up a local corporation, obtaining a job offer in Panama, or making a certain investment in the country. One common requirement is a minimum bank deposit (e.g. having at least $5,000 in a Panamanian bank account) to show financial solvency.
If you don’t plan to work for a local company, Panama now often requires an investment for this visa, for instance, purchasing real estate (historically around $200,000-300,000 in value) or other investments as specified by current rules.
In short, the Friendly Nations program is a quick route to residency for Americans, allowing you to live in Panama and, after meeting certain criteria, even seek permanent residence.
Retiree (Pensionado) Program
Panama actively courts retirees with its Pensionado visa, often hailed as one of the best retiree programs in the world. If you have a lifetime pension of at least $1,000 per month (from Social Security or a private pension, etc.), you can qualify for this visa.
The Pensionado visa grants you permanent residency and comes with added perks like discounts on medical services, entertainment, travel, and more (Panama loves its retirees!). Notably, there’s no age requirement, if you’re, say, 45 and already receiving a qualifying pension, you can apply.
Unlike some countries’ retirement visas, Panama’s program does not force you to purchase property or make any huge investment; it simply focuses on your pension income. Many American retirees take this route, it’s straightforward and once you’re approved, your residency is guaranteed for life (with protection from any future law changes).
The only catch is that Pensionado residents cannot easily convert that status into citizenship, but most find the residency itself more than sufficient.
Other Residency Options
If you’re not retired and don’t want to work locally, Panama offers investment visas as well. Apart from Friendly Nations, there are options like the Person of Means (POM) visa and others. For example, an Investment in Reforestation of around $80,000 can qualify you for residency.
Buying real estate of a certain value (commonly $300,000 or more) is another pathway. Essentially, Panama provides multiple avenues, invest in the economy (real estate, business, forestry, bank deposits, etc.) or show you have steady income, and you can secure the right to live there.
Once you have legal residency, you can come and go as you please, and if you spend 183+ days per year in Panama, you’ll be considered a tax resident and can even obtain a tax residency certificate from Panama’s tax authority (this certificate can be useful if you need to show other jurisdictions that you are paying taxes somewhere, even if in Panama’s case your tax might be zero on foreign income!).
Gaining residency in Panama is a fairly accessible process for Americans. The country welcomes expats, and with a bit of paperwork and either a modest investment or proof of income, you can secure the legal right to reside there long-term. This is the first step to enjoying Panama’s tax benefits, and thankfully, it’s an achievable step for most.
Other Taxes and Financial Considerations in Panama
Aside from income tax, here are other tax factors an American expat in Panama should be aware of. The good news is that most of these are quite moderate:
Sales Tax (VAT)
Panama imposes a 7% sales tax on most goods and services, known locally as ITBMS (Impuesto de Transferencia de Bienes Muebles y Prestación de Servicios).
This Value-Added Tax is much lower than sales tax or VAT in many other countries. Basic food staples, medicines, and medical services are generally exempt. A 7% tax on purchases means the cost of living isn’t inflated too much by taxes when you go shopping or dine out.
Property Tax
Panama recently reformed its property tax system to be more generous to homeowners. Owner-occupied residential properties (primary homes) valued under $120,000 are completely exempt from property tax. If you buy a home above that value, you’ll only pay tax on the portion exceeding $120k, and the rates are low (roughly 0.5% to 0.9% of the value, depending on the value tier).
For example, a $200,000 primary residence would incur tax on $80,000 at around 0.5%, which comes out to only about $400 per year. That’s very low by U.S. standards. Secondary properties or investment real estate have a $30,000 exemption and then slightly higher rates (up to around 0.8% or so).
Additionally, new construction homes often come with 10 to 15-year property tax exemptions as a perk. Many expats find they pay little to nothing in property taxes, especially if their home is modestly priced or new.
Capital Gains Tax
If you sell assets in Panama, like local real estate or shares of a Panamanian company, there is a capital gains tax. The standard rate is 10% on the profit (gain) from the sale. However, Panama often collects an upfront withholding (for example, 3% of the sale price for real estate) at the time of transaction as an advance tax.
You then calculate the actual 10% on your profit and can claim back the difference if the withheld amount was too high. In practice, for most property sales, the 3% withholding is treated as the final tax if your profit margin isn’t huge.
Ten percent is a reasonable capital gains rate (compare that to 15% or more in the U.S.), and remember: this only applies to sales of assets located in Panama. Selling your U.S. stocks or foreign property while you live in Panama would not trigger any Panama tax.
Dividend Taxes
If you start a corporation in Panama or buy shares in a Panamanian company, be aware that Panama does tax corporate profits and dividends if they are sourced from Panama. Corporate earnings in Panama are taxed at 25% normally.
When those profits are distributed as dividends to shareholders, there’s a withholding tax on dividends: typically 10% for Panamanian-source profits.
Interestingly, if a Panama company earns profits from foreign sources (outside Panama) and then distributes dividends, the withholding is only 5%, again reflecting the territorial principle.
Many expats won’t need to deal with this unless you set up a local business, but it’s good to know. If you simply hold investments through a foreign brokerage or have a U.S. company, none of this applies in Panama.
Social Security and Payroll Taxes
If you become employed by a Panamanian company or hire local employees, Panama has social security contributions. Employees contribute 9.75% of wages to social security, and employers contribute 12.25%.
There’s also a small educational insurance tax (around 1.25% for employees and 1.5% for employers). These are similar to payroll taxes (like FICA in the U.S.). However, if you’re working for a foreign employer or freelancing for clients abroad, you would not be part of Panama’s social security system, so these wouldn’t apply. U.S. expats who work remotely often keep paying into U.S. Social Security instead (via self-employment tax), unless they switch to a local job.
No Wealth or Inheritance Taxes
As mentioned earlier, Panama does not impose any net wealth tax or estate/inheritance tax on individuals. Your assets and investments are not going to incur annual wealth taxes (as they might in some European countries), and if you pass away as a resident, Panama won’t take a cut of your estate. This doesn’t eliminate U.S. estate tax considerations for Americans, but Panama won’t add to the burden.
Overall, Panama’s additional taxes are either low or avoidable depending on your activities. Everyday cost of living taxes (sales tax, property tax) are modest. Unless you dive into local business or property flipping, you’ll find the tax bite in Panama to be minimal compared to what you’re used to in the States.
U.S. Tax Considerations for Americans Abroad
Before you start celebrating a 0% tax life, a friendly reminder: American expats are still subject to U.S. taxes on their worldwide income, even if they move to Panama. The U.S. is one of the few countries that taxes based on citizenship, so Uncle Sam doesn’t automatically let you off the hook just because you changed countries.
However, there are provisions that can dramatically reduce or even eliminate U.S. tax while you’re abroad, making a Panama move doubly beneficial:
Foreign Earned Income Exclusion (FEIE)
As a U.S. citizen living abroad, you can exclude a significant amount of your earned income (salary, self-employment income, etc.) from U.S. taxation, provided you meet certain requirements. For the 2025 tax year, the exclusion is up to $130,000 of foreign earned income per person.
This means if you earn, say, $100,000 working remotely from Panama (and meet the IRS’s bona fide resident test or physical presence test), you can avoid U.S. income tax on that $100k completely. If you’re married and both spouses work abroad, you each get an exclusion (approximately $130k each).
This aligns perfectly with Panama’s system: that $100k is also not taxed by Panama (because it’s foreign-sourced income to Panama), resulting in no income tax to Panama and none to the U.S. either completely legal and above board.
Foreign Tax Credit
If you do end up paying any Panama income taxes (for example, you have some local Panamanian income that gets taxed), the U.S. offers a foreign tax credit. Essentially, every dollar you pay to Panama in income taxes can typically offset a dollar of U.S. tax on the same income. This prevents double taxation.
In practice, since Panama’s rates (25% top) are lower than U.S. rates, high earners might still owe a little difference to the IRS on Panama-source income. But many expats structure their finances such that either their income is foreign-earned (and excluded via FEIE) or is passive foreign income that Panama doesn’t tax (so no foreign tax credit needed because only the IRS taxes it). The result is often a very low overall tax bill.
State Taxes
Don’t forget state taxes. If you’re moving out of the U.S. to Panama, you’ll want to sever residency with your home state (if it has income tax) to stop state taxation. Establishing residency in Panama can help show you don’t intend to return to your old state.
Most states will not tax you once you’re no longer a resident there, but check the rules for things like California or New York, which have sticky residency rules. The Panama residency papers, a home lease or purchase, and spending most of your time outside the U.S. will support your case that your new tax home is Panama.
Reporting Requirements
Living in Panama and opening local bank accounts or businesses means you may have additional U.S. reporting, like FBAR (Foreign Bank Account Report) if you hold over $10k in foreign accounts, and possibly Form 8938 for foreign assets.
These aren’t taxes, but it’s part of the life of an American expat to file a bit of extra paperwork each year. It’s a small hassle for the big reward of legal tax reduction. Hiring a tax advisor familiar with expat issues is wise (and many Panama expats use U.S. CPAs who specialize in this).
In summary, moving to Panama can nearly eliminate your U.S. tax liability if done correctly, but you have to use the available exclusions and abide by the rules. Many Americans in Panama end up paying little to nothing to the IRS, especially if their income is under the FEIE limit (~$130k) or if they’re retirees living on Social Security (which often isn’t taxable at low levels anyway, and Panama doesn’t tax it either).
The key takeaway is that Panama won’t tax you on foreign income, and the U.S. gives you tools to drastically reduce your own federal tax while abroad. With proper planning, you truly can enjoy a low-tax life in Panama legally. Always file your annual U.S. returns though, you don’t want to fall out of compliance with the IRS, even if you owe zero dollars.
Enjoying a Low-Tax Life in Panama
Panama stands out as a top choice for Americans seeking both a better quality of life and a lighter tax burden. The combination of Panama’s territorial tax system and U.S. expat tax benefits (like the FEIE) can allow you to keep much more of your income in your pocket.
You could be strolling on a Panama beach or exploring rainforests instead of handing over a big chunk of your paycheck to the tax man, not a bad trade-off!
Of course, the specifics of everyone’s situation differ. Before making the leap, it’s wise to consult with a professional who understands both Panama and U.S. tax rules to ensure everything is set up correctly. How do you get started?
One option is to reach out to a reputable international tax and legal service with Panama expertise. For example, our law firm in Panama and offers guidance to expats on establishing residency and optimizing taxes, “our team of lawyers in Panama will be happy to guide you through the process,” as their site notes.
Partners like these can walk you through visa applications, property purchases, and tax strategies, making your transition smooth and fully compliant.
In conclusion, Panama offers American expats an almost unbeatable mix of warm climate, modern amenities, and genuine tax savings. By taking advantage of Panama’s territorial tax system and aligning your U.S. tax strategy accordingly, you can live the dream abroad while legally minimizing taxes.
It’s always recommended to get personalized advice for your circumstances, but thousands of expats have already made Panama their home and dramatically reduced their tax bills.